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The self-preservation section that goes with the cash flow

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legal matters

Judgments sometimes extend beyond the matters strictly at issue, either ventur - ing into sage observations or an occasional entertaining sideshow. Such judicial musings are known as 'obiter dicta' or simply 'obiter'. The Court of Appeal's judgment in Rupert Morgan Building Services v Jervis (12 November 2003) is a fine example of both judicial observation and amusing 'obiter'.

The facts: Mr and Mrs Jervis had building works carried out at their cottage by Rupert Morgan. The architect issued an interim certificate, part of which was disputed by the clients. In the proceedings before the court the contractor claimed the disputed balance on the certificate.

The law: the court was asked to rule on the provision in section 111 of the HGCRA that provides for notices to be given where an employer wants to withhold part or all of a payment that is 'due under the contract'. Such notices have to specify the amount that is to be withheld, the rea - son for withholding, and be given within a certain timeframe. In this case no such notice had been served.

The contractor said that as no withhold - ing notice had been served, it was entitled to be paid. Mr and Mrs Jervis argued that the sum that they withheld related to works that had not been carried out, or works already included in the contract, or works that had already been paid for.

As such, they said, the withheld sum was not 'due under the contract'. It fol - lowed that they did not have to serve a notice in respect of it, and the absence of a notice was no bar to their hanging on to their money.

There has been much debate in the past about the effect of section 111, and with - holding notices, and whether a disgruntled client can raise counterclaims - or set-off against the sums due - amounts that the employer is claiming back from the builder.

But Lord Justice Jacob concluded that the answer to the problem became clear once it was appreciated that section 111 is only a provision about cash flow. It does not make any payment, whether due under an interim certificate, final certificate, or any other mechanism, irrevocably due.

It is open to the employer to get their money back, for example by a reduced later certificate, or by adjudication or other proceedings. But in the first instance Mr and Mrs Jervis had to pay the sum which, because of the interim certificate, had become due. So if a sum is due to the builder, and no withholding notice has been served, the client has no option but to pay up.

The sage observations: Lord Justice Jacob went on to observe that a key risk of the statutory scheme from the client's point of view is the possibility that the builder may become insolvent. Once the money is paid over, there will be little chance of getting it back if the builder has gone bust. But pro - tection for the client is built into the scheme - they have to serve a withholding notice at the right time. His Lordship observed: 'No doubt a good architect would inform a lay client about the possi - bility of serving such a notice - indeed the architect may (I express no opinion) have a duty to do so. Moreover the client may (again I express no opinion) have a remedy against the architect if the latter negligently issues a certificate for too much.'

This is a weighty 'obiter' of which the architectural profession would do well to take note.

The entertaining sideshow: to illustrate the usefulness of the statutory payment provisions, Lord Justice Sedley's judgment set out a potted history of the building of the Royal Courts of Justice, reflecting that the project was bedevilled by cashflow problems. He said: 'The Office of Works had inevitably awarded the contract to the lowest bidder, a modest and undercapitalised Southampton firm.

'In spite of a series of generous interim certificates issued by the architect, George Edmund Street, the contractors stopped paying the stone carvers and other subcontractors. By the time the building was finally completed, two-anda- half years behind schedule, they were insolvent.' Had section 111 then been in force, he observed, it would have protected the stone carvers by preserving their cash flow.

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